3 Financial Professionals Every Investor Should Know About
There are three types of financial professionals that investors come across during their investment journey. Each type offers different services, has different credentials, and gets paid in different ways. At ViableFolio, our mission is to create a fourth option for independent investors. This article will break down all four options detailing their services, compensation and licenses.
- Insurance Agents: Provide clients with access to annuities and life insurance products
- Broker Dealers: Give clients access to invest in various markets as well as proprietary research to support their investment decisions
- Investment Advisor: Manage clients investment portfolios, provide tailored advice, or both.
Each type of license affects an investment professional’s motivations, incentives, and legal authority, but it does not indicate their qualifications or experience. An individual may hold one, two, or all three licenses, but the rules and responsibilities of each do not overlap. For instance, an insurance agent does not become a fiduciary when selling insurance products, even if they are also licensed as a fiduciary Investment Advisor.
Insurance Agents
Services
Insurance agents give clients access to life insurance, which provides financial security for your loved ones in the event of your death or disability. The two main types of life insurance are Term Life Insurance and Permanent Life Insurance.
- Term Life Insurance provides coverage for a specific period, such as 10, 20, or 30 years. It is generally the lowest-cost option, making it suitable for most people who need substantial coverage during periods, such as raising children or paying off a mortgage. Since it has no cash value and only pays a death benefit if you pass away during the term, the costs are kept lower.
- Permanent Life Insurance offers lifelong coverage and also accrues cash value over time, which can be borrowed against or withdrawn. This type of insurance can be used for estate planning by the wealthy, as it can help simplify the process of transferring wealth to beneficiaries. However, the higher premiums and lower investment returns make it less efficient as a means of building wealth compared to other investment options.
Agents also sell annuities to help manage longevity risk, such as outliving the value of your retirement savings, by providing a steady stream of retirement income. However, many annuities are inefficient due to their high costs and complexity, making them unsuitable as investment vehicles for most individuals.
Compensation
Life insurance agents make money mostly from commissions. This means they earn a percentage of the premiums paid by their clients. Permanent life insurance and annuities usually have higher premiums, which means higher commissions, so agents may push these products more. Some agents also get bonuses or rewards for selling a lot or meeting certain goals. This compensation structure does not always align well with the client’s best interests, which can lead to some agents pushing complicated products when simpler options, like term life insurance, might be more suitable.
Qualifications
To become a life insurance agent, individuals must obtain the appropriate state license by completing pre-licensing education, which varies by state, and passing a state licensing exam. They must also complete continuing education to maintain their license. Many agents benefit from additional training or certifications, such as the Certified Insurance Counselor (CIC) or Chartered Life Underwriter (CLU), to enhance their credibility and expertise.
Broker Dealer
Services
Broker-dealers help clients buy and sell securities, such as stocks, bonds, and mutual funds. Even if you prefer a do-it-yourself (DIY) approach to investing, you still need a broker-dealer, often through a discount broker, to execute trades. There are two main types of broker-dealers: full-service brokers, who provide personalized investment advice, and discount brokers, who mainly help execute trades without offering advice.
Compensation
Full Service Brokers: Broker-dealers are compensated primarily through commissions, which are fees earned when buying or selling securities on behalf of their clients. When selling clients mutual funds broker-dealers are compensated by something called a load.
- Class A shares often have an upfront sales load (a fee taken from your initial investment). For instance, if you invest $100, a load of $6 means that only $94 is actually invested.
- Class B shares typically do not have an upfront load but instead have a back-end load, which is a fee paid when selling the shares. These shares also tend to have higher ongoing expenses compared to Class A shares and may convert to Class A shares after a certain period.
- Class C shares have ongoing fees, which act like a continuous charge similar to an asset under management (AUM) fee.
This compensation model can create conflicts of interest between the broker and the client, as brokers may have an incentive to encourage unnecessary buying and selling of stocks to generate more commissions.
Discount Brokers: The way discount brokers make money can vary between different brokers. Discount brokers make money by charging small fees for each trade clients make. They can also earn money from other sources, such as getting paid to direct trades to specific companies (known as payment for order flow) and charging for extra services or data.
Qualifications
To become a broker-dealer, individuals must pass the Series 7 exam, which is the minimum requirement. This exam allows them to sell securities and execute trades on behalf of clients. While this qualification allows brokers to provide recommendations, it does not mean they act in a fiduciary capacity. Broker-dealers are not fiduciaries, meaning they are not required to put their clients’ interests ahead of their own. Instead, they must adhere to a suitability standard, which means recommending investments that are suitable for the client, but not necessarily the best option available. Broker-dealers must continue to comply with industry regulations and complete additional training as needed.
Investment Advisor
Services
Investment Advisors help clients manage their investment portfolios and provide personalized financial advice. They can also provide additional value to their clients by providing services like tax strategy, estate planning, cash flow management, and retirement projections. Most investment advisors aim to add value in all these areas, ensuring that their services go beyond simply managing a clients portfolio.
Compensation
Most investment advisors use a fee-based model, earning a percentage of assets under management (AUM). For example, if the annual fee is 1%, it may be charged quarterly at 0.25%. Unless they are “fee-only,” advisors may also earn commissions for selling products. The AUM model can create a conflict of interest between advisor and client if the advisor is more focused on managing larger assets to increase their income.
Other compensation models include:
- Fee-Based: Advisors can earn AUM fees along with commissions for products sold.
- Fee-Only: Advisors may only charge AUM, retainer, or flat fees without earning commissions.
- Retainer Fee: A flat, ongoing fee paid at regular intervals, often annually, for a set of services.
- Project-Based Fee: A one-time fee for a specific financial planning project.
- Hourly Fee: Charged based on the amount of time spent working with a client.
Qualifications
To be an investment advisor, individuals must pass the Series 65 or Series 66 exam. Many also earn certifications like Certified Financial Planner (CFP) or Chartered Financial Analyst (CFA), which require rigorous exams and experience. To verify if your advisor is a fiduciary, you can check the IAPD website to see if they are a Registered Investment Advisor (RIA). You can also request to review their Form ADV, which all fiduciaries are required to file. Fiduciaries are legally obligated to put their clients’ interests above their own.
Don't Forget
Each type of license shapes an investment professional’s motivations, incentives, and legal authority, but it does not reflect their qualifications or experience. An individual may hold one, two, or all three licenses, yet the rules and responsibilities associated with each remain distinct. For example, an insurance agent does not automatically become a fiduciary when selling insurance products, even if they are also licensed as a fiduciary Investment Advisor.
ViableFolio
Services
ViableFolio offers independent investors access to advanced educational resources and financial tools, enabling them to take control of their own investments. Unlike traditional financial advisors, ViableFolio does not offer direct portfolio management or advice. Instead, it gives users tools such as educational content, stock screeners, portfolio analytics. These services help individuals make informed decisions and manage their financial goals on their own terms, bridging the gap between financial advisors and self-directed investing.
Compensation
ViableFolio operates on a transparent subscription-based model. Users pay a flat fee for access to our educational content and financial tools. This approach ensures that there are no hidden fees or conflicts of interest, allowing users to focus solely on their financial growth without worrying about.
Qualifications
ViableFolio is designed for individuals of all experience levels, from beginners to seasoned investors. No specific financial qualifications are required to use ViableFolio’s platform.